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Interview with Daniel Carlson, CFO of American Sands Energy (AMSE)

Hydraulic fracturing has been in the news a lot over the last few years. As both a primary driving force of what little economic growth was to be found during the Great Recession and a practice that’s drawn heavy criticism from environmentalists and other community activists, “fracking” has gotten a lot of focus. And the tar sands from Alberta has been similarly brought into the public eye, with the Keystone Pipeline getting treated like a political football and existing as the center of a major political firestorm.

However, there remain some oil and gas exploration plays that manage to skirt around these issues, extracting crude oil with low levels of capital expenditure and with minimal environmental impact. One such play is American Sands Energy (AMSE) , which is focused on separating crude oil from “oil-wet” oil sands using a process that doesn’t use large amounts of water in the drought-parched American west.

Equities.com sat down with Daniel Carlson, American Sands Energy’s Chief Financial Officer, to talk about the company and why the future may be very bright for companies developing oil-wet oil sands resources.

EQ: Can you give us a basic introduction to American Sands Energy? Where do you operate and what is your focus?

Daniel Carlson: American Sands Energy is an exploration-stage oil and gas company located in Salt Lake City. We have a project that is about 150 miles from Salt Lake City in a town called Sunnyside. We are focused on unconventional oil from oil-wet oilsands. We believe that oil-wet oilsands will be the next wave of unconventional oil that’s going to get a lot of traction over the next few years. We have what we believe is the most well-defined resource in the United States for the oil-wet oilsands. We have a technology that we’ve tested through the pilot stage and we think is ready to be rolled out on a broader basis.

EQ: Can you expand a little bit on what oil-wet oilsands are? Why it is that you think this is the next big play in unconventional oil?

Daniel Carlson: Oil-wet oilsands are basically impregnated sandstones. You picture a block of sandstone, it’s usually very light-weight and a brownish color. What we have is sandstone that’s been impregnated with oil many, many millions of years ago. The oil was in the sand, it lost viscosity and a lot of its moisture content, and it got to the point where it’s real heavy oil. So we have this rock that is pregnant with oil. What we do is mine the rock, grind it up into sand particles, and then we take those sand particles and put them in a solvent bath and wash the bitumen off of the sand.

What makes this exciting is that from an environmental standpoint, we have a solvent recovery technology that washes the bitumen off the sand and leaves the sand ready to be returned directly to the environment. We don’t have any tailings piles. We don’t use water in that process, which is very important with the current drought situation in the U.S. We also don’t produce any dirty water. So we do have a mining process, but, at the end of the day, we have reclamation-ready sand that’s ready to go back into the ground. From an environmental standpoint, we think we’re really benign compared with the other forms of unconventional oil that are out there.

But the other exciting aspect of our process is that, from a cost perspective, we’re very reasonable. Our breakeven cost-per-barrel is around $45 WTI. The CAPEX involved in this project is not substantial compared to some of these other projects. We’re definitely cheaper than the Canadian oil sands on a CAPEX basis. Compared with fracking, or shale oil, we don’t suffer depletion with our process. Fracking requires continual capex to maintain production. Therefore, over time, we believe we are much more capital efficient than the frackers as well. For those two reasons, environmentally and cost-wise, we think that oil-wet oilsands is the next wave of unconventional oil. Unlike what they have in Athabasca, which is specific to Canada in terms of water-wet oilsands, oil-wet oilsands exist in many places globally. So we think the U.S. has the potential to be rolled out on multiple geographies over the next few years. There’s some in the Mid-East, there’s some in South America, there’s some in Africa. That’s why we think this is the next wave of unconventional oil.

EQ: Can you talk a little more about the Sunnyside Project? How large it is in terms of barrels of recoverable oil? Where do you stand with that project currently in terms of permitting, and when do you expect to be in operation?

Daniel Carlson: The Sunnyside Project is very unique in that it’s a very well-defined resource. The reason for this is that back in the 1980s, two of the majors at different times—Chevron (CVX) and then AMOCO (BP) —actually controlled this property and spent about $40 million drilling out and proving the resource. It’s a P50-proven resource of over 1.1 billion barrels at the Sunnyside location. We currently have leases on about 150 million barrels of those barrels. We also have the potential over time to acquire these additional barrels that are adjacent to ours.

While this is probably not the largest oil sands resource in the U.S., it is the most well-defined due to that historic drilling that took place. What makes it very exciting from a project standpoint is the fact that we consider this to be basically an infrastructure-ready project. We are about 3 miles from paved road. There’s already three-phase power to the site. We are seven miles from the largest garbage dump in the U.S., which has a separate rail heading and a co-generation facility located there.

So, from that standpoint, we don’t have to put a lot of money into the project for getting it ready to go into operation. The infrastructure’s already there in existence.

EQ: Some people might do a bit of a double-take to hear an exploration-stage oil and gas company talking about environmental impact in the way you do. But that’s clearly something American Sands Energy is focused on. Can you talk a little bit about how you see environmental concerns fitting into the future of your industry?

Daniel Carlson: I think any project that involves hydrocarbons, you have to understand what your impact is environmentally and figure out ways to minimize it. There are some projects that are very low-impact environmentally and some that are much higher, obviously.

We look at it from two standpoints. One is “what is the amount of energy that goes into producing a barrel of oil?” And in our case, with a mining process and a simple solvent recovery, we don’t have to superheat anything in this process and we don’t have to use a high pressure. So, it creates a situation where, relative to other oil sands projects, we are much lower in terms of the cost, the amount of energy put into producing one barrel.

The second consideration is what is the environmental impact of a project. This is particularly important regarding the use of water. This is a real key to our process as we do not use or produce any water during the extraction process. Water is something that’s in limited quantity in the West, and you certainly don’t want to produce any dirty water and potentially contaminate the water system.

So in our case, we don’t have any water involved in the process—either input or output—we take that concern away from it. I think that, over time, is going to be a very important differential in our favor.

EQ: For a little bit of speculative fun, what do you think the price of crude will be over the next year or two? Do you think $100+ a barrel is here to stay? Are they going higher? Do you think it’s going to back off some?

Daniel Carlson: A range of $80 to $100 a barrel would be my guess. I think that you go over $100 when the situation in the mid-east flares up, and there’s potential for supply disruptions. I don’t see it going sustainably below $80 though, because that’s really the marginal cost of production of a number of the producers in the fracking space and in the Canadian oilsands space. So, below those prices, you’ll start to see a lot of supply drop offline. That’s why I think we’re kind of stuck in a band, myself.

EQ: What should investors be looking out for from American Sands Energy in the future?

Daniel Carlson: Well, we do have some major catalysts coming up.

I didn’t speak a lot about the permitting process and where we stand in that, but we did file our permit application in March of this year. It’s an integrative process where the Department of Oil, Gas, and Mining in Utah come back to us with questions, we go back with answers, and we believe we’re nearing the end of this process. We hope that we could be permitted by yearend.

Second thing is, we’ve engaged F.L. Smidth to do a feasibility study for our five thousand barrel-per-day facility, which also includes a well-defined cost estimate involved in that. We should be getting that study back in the month of September here, and that should be a good data point for investors to look at in terms of “how do you look at us” and “how you’ll get our CAPEX and OPEX,” etc. That’s it. Then post-permitting, we will go out on a larger financing to go into production. Those are the major events for the company in the near future.

EQ: Any additional closing thoughts or comments?

Daniel Carlson: We are one of a handful of companies focused on what we believe is the next wave of unconventional oil, so I think it’s an exciting time for AMSE. As we get going into production at Sunnyside, the opportunities for us to take our technology and take our broader global basis are substantial.

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